Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter?
IMF Working Papers, March 1, 2011
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- Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter?
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Bibliographic details
- Authors: Laura Jaramillo
- Published: March 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455218981.001
Summary of main findings
- Sovereign investment grade status reduces spreads by 36 percent, above and beyond what is implied by macroeconomic fundamentals.
- Upgrades within the investment grade asset class are associated with a 5-10 percent reduction in spreads, ceteris paribus.
- Movements within the speculative grade asset class have no impact on spreads, ceteris paribus.
- Global financial conditions play a central role in determining spreads.
- Market sentiment improves with lower external public debt to GDP levels and higher domestic growth rates.
Data and methodology
- Sample: panel framework for 35 emerging markets between 1997 and 2010.
Policy-relevant implications (as indicated by the analysis)
- Achieving and maintaining investment grade status is associated with materially lower sovereign spreads for emerging markets, beyond fundamentals.
- Improvements in macroeconomic fundamentals that lower external public debt to GDP and raise domestic growth are associated with better market sentiment and may help lower spreads.
- Global financial conditions are a dominant determinant of spreads, implying that external shocks and global market sentiment can override domestic improvements.
This summary is based on "Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter?" by Laura Jaramillo, IMF Working Papers 2011, 044 (2011).
Content in this bundle
- 5. Sovereign Spread Minus Cross-Country Median